California’s Fiscal Outlook

November 16, 2018

The Budget Is in Remarkably Good Shape. It is difficult to overstate how good the budget’s condition is today. Under our estimates of revenues and spending, the state’s constitutional reserve would reach $14.5 billion by the end of 2019‑20. In addition, we project the Legislature will have an additional $14.8 billion in resources available to allocate in the 2019‑20 budget process. The Legislature can use these funds to build more budget reserves or make new one‑time and/or ongoing budget commitments. By historical standards, this surplus is extraordinary.

Longer‑Term Outlook Is Positive. The nearby figure displays our longer‑term General Fund outlook under two different scenarios and assuming current law and policies stay the same. The first scenario shows continuing economic growth and the second shows a recession beginning in 2020‑21. If the economy continues to grow, as shown on the left side of the figure, the state has operating surpluses averaging around $4.5 billion per year, but declining over time. In the recession scenario, as shown on the right side, the state has enough reserves to cover its deficits over the outlook period.

With More Commitments, Reserves Might Not Fully Cover the Budget Problem. Both of these scenarios assume the Legislature makes no new commitments (such as spending increases or tax reductions) in 2019‑20 or later. That is, under these scenarios, the Legislature would use all of the nearly $15 billion in available resources in 2019‑20 to build more reserves (reaching a total reserve level of about $30 billion by the end of 2019‑20). If the Legislature makes new ongoing commitments in 2019‑20, however, reserve levels under a recession scenario would be lower and the state would face higher operating deficits. Depending on the extent of these commitments, reserves might not fully cover a budget problem that emerges during a recession.